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How one firm limited the risk of being small.

Can a sole practitioner survive by remaining small and limiting services? One CPA found a way.

Ron Stewart doesn't do audits. He also has no interest in having any partners in his six-person CPA firm in Monroe, Louisiana. His intention is to provide mostly tax, consulting and accounting services to agricultural and other small businesses as well as to individuals in his corner of northeastern Louisiana, and he has done so with great success.

He always had known there were risks for small firms, but he never had to confront them until late 1990, when his firm faced the greatest challenge in its history. His experience forced him to explore new options that would limit the kinds of dangers faced by all small CPA firms. As a result, he hammered together an innovative agreement he hopes will ensure his and his firm's continued financial well-being.


Stewart worked in industry, academia and for a local and a large national firm before he opened Stewart & Company in Monroe in 1980. He wanted to run his own shop and to provide the kind of personal attention he felt his small business and individual clients were seeking. He had never performed an audit and decided early not to offer a wide range of services but, instead, to concentrate on his own strengths. (For a profile of Stewart's firm, see the sidebar on page 63.)

Choosing the kinds of clients he wanted to serve was simple because of his location. "At management of an accounting practice conferences, they always tell you to find your concentration by looking at your top 10 clients. Three of our top 10 clients are very, very large farming families that have from 5,000 to 10,000 acres of some of the richest farmland in the Mississippi Delta, so we have a concentration in agriculture. We also have a concentration in small business because there isn't any big business in this area."

Stewart understood there were many advantages to being small, along with some disadvantages, such as limits on resources and services the firm could offer. "From 1980 until about August 1990, although I talked about the disadvantages of being small, I guess I never believed in them or thought they would affect me." His mind was changed in 1990, when one of his five associates, a reservist, was activated to Saudi Arabia as tensions in the Persian Gulf flared. When war finally broke out in January 1991, the spouse of one firm member and the son of another were involved. "So three of the six families in this organization had their lives totally turned upside down by this war," Stewart recalls.


"What was brought to my attention was that I was experiencing the risks of being small," he says. One person was gone. The husband of another, Cynthia Avallone, was away, leaving her with two small children, one under a year old. Those two staff members traditionally were the major producers during tax season. "I would come in every morning praying that Cindy would show up, that she wouldn't get into a car accident or have some other emergency," he says.

A firm offered to lend Stewart extra staff for the tax season crunch. "But furnishing me with some people who didn't know our systems and procedures, during a war, during tax season, would have meant my own people would have had to spend their time training them." Instead, Stewart flew in a former staff member from North Carolina for two two-week stints because she was familiar with firm practices and clientele.

The 1991 tax filing season became the worst tax season Stewart spent in his career. "Not because of how it turned out, because it turned out okay. But because of how it could have turned out." Stewart found himself confronting serious doubts during the season about whether his staff could perform their work on time and about what it would mean for his firm if they could not.


In the midst of his crisis, Stewart was approached by another firm that wanted to explore mutually beneficial opportunities. Heard, McElroy & Vestal, a full-service, 80-person, 12-partner firm in Shreveport, heard of Stewart through another sole practitioner.

The firm invited Stewart to its fall 1990 partner retreat, and he concluded there that the firms' practice philosophies were very similar, as were many clients and the communities the two firms served. But both firms had reservations about an immediate merger. They decided instead to consider other ways to pool their resources.

Stewart had been thinking of entering into a practice continuation agreement after seeing a presentation on their benefits given by Texas CPA John Eads, an author and expert on the subject. He now began to consider more seriously how to ensure his firm's continuity in the face of various kinds of disasters. The first step, before he entered any formal, legal association, was a very informal networking agreement between Stewart & Company and Heard McElroy.

Stewart's clients frequently grew large enough to need audits or other complex services his firm could not offer them. When asked, Stewart had always recommended larger firms to handle these engagements, but the kind of agreement he initiated with Heard McElroy allowed him to approach clients with suggestions for new services and with complete trust and confidence in the firm he was recommending.

The networking idea was simple. It was based mainly on Stewart's belief the Heard McElroy partners were competent enough accountants to provide complicated services to his clients and honorable enough people to be trusted in forming relationships with them. The arrangement would help guarantee that Stewart clients who needed complex services would not take their tax and accounting work with them when they found other CPAs to perform those services. It also would allow Stewart to offer his clients a wide range of new services available to them through his new business associates.

"It made sense to be able to provide to clients services that we didn't have without having to make the investment in providing them," he says.

Stewart has been approached by new clients seeking services his firm doesn't perform and has been able to promote his firm's access to such services. He attends all introduction meetings between the clients and Heard McElroy, sometimes serving as the client's finance officer throughout the engagement, and charges the client for his time.

"Now our service limitations are only those of the two firms together," he observes. "Our clients have the benefits of the personal relationships offered by a smaller firm, but yet we have access to all the wonderful knowledge and skills of the big firm. As small practitioners, we either have to become very specialized or enter into relationships like this."

The arrangement has enabled Stewart to develop more business from existing clients because "I have a new array of services, services they didn't even know they might want because I haven't told them about them." Cafeteria benefit plans are one example. "Many of my clients are candidates for cafeteria plans. I can educate them on what they are and demonstrate and quantify the savings," but only the larger firm has the experience and resources needed to implement the product.

Stewart also has taken advantage of the other firm's substantial research resources. "They have a big library. We don't have a big library, but we have their phone number." And Heard McElroy has provided Stewart with computer support.

Heard McElroy uses its own engagement letter when it works with Stewart clients. Each firm is paid separately and Stewart never knows the other firm's fees, unless he is functioning as the client's representative on the engagement. In addition, the two firms have begun making joint presentations to certain types of clients, such as credit unions, promoting the combined benefits they offer.


After the networking arrangement proved successful, the two firms last fall signed a practice continuation agreement that obligates Heard McElroy to operate Stewart & Company in the event of Stewart's temporary disability or to buy the firm if he is permanently disabled or dies.

To learn more about Stewart's firm and about how the two firms can work together, Heard McElroy sent one of its senior managers to work full-time for Stewart for six weeks. The manager performed various services as if he were a Stewart & Company associate, although he remained a Heard McElroy employee.

"Heard McElroy is very interested in our procedures, since we look at things differently because we're small. They see efficiencies we've achieved that will help them. And they already have bought and paid for experience that we haven't made available to our clients," Stewart says.

Stewart, working in close contact with Heard McElroy senior partner Gilbert R. Shanley, Jr., has had a tremendous amount of interaction with the larger firm during the six months since the practice continuation agreement was signed. He has attended several partner retreats and meetings as well as made a presentation on the status of various professional issues based on his experience on the American Institute of CPAs management of an accounting practice committee. Stewart believes it's important for small firms to understand the value of the insights they have to offer larger practices.

"We have so much to offer each other. We look at their big firm and say, 'You can't make a decision without a committee.' They look at me and say, 'You make them too quickly. You don't give them enough thought.'"

The Heard McElroy senior manager's experience is an insurance policy for both firms. "If I get hit by a bus, they have someone who knows about this business," Stewart explains. "And if war breaks out again, I don't have to call someone in North Carolina. They have someone ready who can hit the ground working."


Many small firm owners hesitate to associate with larger firms in the belief they'll lose clients to a more powerful competitor. In Stewart's case, his firm's four biggest clients long had been audited by local offices of large national firms. Stewart acted as the client's CFO on these engagements and never perceived the firms as trying to recruit his clients.

"Not only didn't they do it, they weren't capable of it because they didn't offer the kind of personal attention small firms do," he reports. "I find that in smaller communities such as this one, the personal-relationship development skills are more important than the technical skills. If the big firms steal your clients, you didn't have a very good relationship with them. And I sell relationships.

"You must understand that what we do is not very sophisticated," he continues. "We do basic accounting and tax and management consulting services. We don't often have an occasion to do a fancy, complex liquidation or work for a multitiered corporation. But we do help people determine what they want. These clients want to know first that you care about them and, once that relationship's built, then you really can help them define what wealth means to them." It is Stewart's belief that small firms are uniquely suited to that task.

But small firms face fierce competition that forces them to distinguish themselves and offer clients something extra. "In years past, I thought I was a good salesman, but I wasn't," he concedes. "I was a good client picker. If I opened my door and there were five clients standing outside, I could pick the best two. Now you open the door and there's one scraggly old client out there and every CPA in town is trying very hard to make a deal with him."


Stewart has several suggestions for firms seeking a reliable networking partner. His main advice is to assess the character of the people involved. He had confidence in the Heard McElroy partners because "I realized they were, first, good people and, then, good professionals, which is the very same thing I look for in a client.

"The fact they made themselves vulnerable by inviting me to their partner retreat" also reassured Stewart. The larger firm is making an effort to get to know Stewart's staff. Last fall it invited all six firm members and their families to a firm picnic and its Christmas party.

Stewart also is comfortable with the larger firm's partners because they share the same traditional, down-home values and philosophy about client service. And distance definitely plays an important role in Stewart's satisfaction with the arrangement, since 100 miles separate Shreveport from Monroe. He suggests associating with a firm between 25 and 100 miles away to prevent competition but encourage normal business contacts.


The moral for small firms, Stewart believes, is there are ways to avoid the disadvantages of being a small firm without having to face many of the problems associated with larger firms.

"We have been problem identifiers, not problem solvers," he says of himself and other practitioners. As CPAs take a more active role in their clients' businesses, they also can fashion arrangements such as Stewart's that offer a wider array of benefits for firms and their clients.
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Article Details
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Title Annotation:Louisiana
Author:Dennis, Anita
Publication:Journal of Accountancy
Date:Jun 1, 1992
Previous Article:How to match computers and accounting software.
Next Article:Opportunities in litigation services.

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